Synopsis: a ‘revenue neutral’ carbon tax is better than a cap and trade scheme because the carbon tax allows the reduction of other taxes, thereby offsetting the majority of the economic impact, whereas a cap and trade scheme will impose an added cost when the government buys back emissions permits. The strict annual limitations on emissions imposed by a cap and trade scheme are unnecessary from an environmental perspective. The price fluctuations they create are bad for the economy and create a barrier to investment in reducing our emissions.

The Labor government has rejected Rudd’s Carbon Pollution Reduction Scheme and is currently reviewing its strategy for reducing Australia’s greenhouse emissions. This review is not about science, nor is it about targets for emissions reduction. It is about the mechanism for reducing emissions. I hope this is because they have realised that cap and trade is a mistake and we should opt for a tax on greenhouse emissions. It is a good sign that both the media and politicians are at least using the word tax on a regular basis, although this is partly because the media has begun to equate a tax with a trading scheme.

A carbon tax raises a steady stream of revenue. This allows the reduction in other taxes on environmentally and socially benign items (eg income tax, GST). A carbon tax will raise revenue for at least half a century. As it is phased out it will most likely be replaced with other ‘green’ taxes as new threats to the environment arise.

A tax differs from a trading scheme in that the government sets the price and allows market forces to determine the quantity being consumed or traded. In contrast, under a trading scheme the government dictates the quantity being traded and allows market forces to determine the price. It is wrong to say that one scheme makes more use of market forces. Both schemes make the most use of market forces that is possible while still allowing the government to intervene to correct the ‘market failure’ that created the problem (the market failed in that it did not already internalise the environmental cost into the price). They differ however in the outcome these market forces achieve.

Under a cap and trade scheme, the outcome is a fixed annual quantity of emissions, with a wildly fluctuating price. Under a carbon tax, the outcome is a steady price on emissions and a gradual reduction in annual emissions. The fixed emissions under a cap and trade scheme have been promoted as an advantage over a tax, however this is not the outcome we want for the environment – we want a gradual reduction. Furthermore, the annual variation in emissions is totally irrelevant from an environmental perspective. What matters is the cumulative emissions over several decades. This depends to a large extent on the economic impact of whatever mechanism we choose for reducing emissions – the better the mechanism, the more long term emissions reductions we achieve and the less the impact on the economy.

The cost of the fixed annual emissions is a wildly fluctuating price. At first, and each time the government reduces emissions, the price will skyrocket. It takes time to build infrastructure and change habits. However, eventually it will happen and the targets will be easily achieved. When this happens, the price plummets. This happened in Europe. Anyone interested in investing in emissions reduction will be forced to go for the quick fix. Any option that takes a long time to develop (eg new technology), implement (new infrastructure) or pay off will be discounted because of the uncertainty created by the unpredictable price on emissions.

A carbon tax on the other hand provides what the economy needs to respond appropriately – certainty about the return on investment from emissions reduction technology and infrastructure. If the price is set right, it also achieves our environmental goal – a steady reduction in emissions over many years.

Both schemes require changes over time. Under a cap and trade scheme, the government will need to buy back emissions rights from large polluters. This will impose a cost on taxpayers. We will not only pay more for electricity (which goes into the pockets of polluters), we will have to pay higher taxes to buy back emissions rights – money which again goes into the pockets of big polluters. No matter what plans the government makes now, the politics of the day will always dictate what happens in the future. Under cap and trade, the government will have no choice but to take the price into account when imposing further reductions in emissions. Likewise under a tax the government will be forced to take the economic situation into account when deciding if the tax needs to be increased in order to meet long term targets.

Economists cannot predict long into the future. They are very good at predicting short term outcomes, because they measure short term responses to changes all the time. Long term changes depend on new technology, structural changes to how our economy operates and political changes. No-one can predict these. Nor can we impose limitations on later generations as a substitute for making changes ourselves. Right now, our best approach for reducing emissions is to tax them at a rate that will result in a steady reduction in emissions over the next decade, and to use the revenue raised to reduce other taxes, thereby reducing the economic impact and leaving our society more able to make whatever changes become necessary in the future.

and how will reducing our emmissions from 1.4% of world total to a prposed .9% of world total make any difference in the grand scale of things.

It will reduce global emissions by 0.5% - which is a big impact for a country with only 0.3% of the global population. More importantly, we will not be holding up the rest of the world like we have for the last decade. The geopolitical impact will be even greater than the more direct impact. For example, in a single move we could halve the number of developed countries that have not ratified kyoto.

Do you perhaps think that it is OK to do far more than your fair share of polluting so long as you think of yourself as part of a small group rather than a large one? Can you explain how that is rational?

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how will that help and at how much of an economic cost and disaster to our economy????

So now you are a doomsayer? It will only harm the economy if we go about it the wrong way - for example using Abbott's hair brained scheme.

Can you explain why the CEO of BHP - one of our most emissions intensive companies - has spoken out in favour of action, and in particular in favour of a revenue neutral carbon tax? Who is the doomsayer now?

Can you explain why the CEO of BHP - one of our most emissions intensive companies - has spoken out in favour of action, and in particular in favour of a revenue neutral carbon tax? Who is the doomsayer now?

The corporate world in general is in favour of action. It has been a waiting game.

Ultimately the world needs to reduce greenhouse gas emissions to zero, but that clearly can not happen in the short term.

and how will reducing our emmissions from 1.4% of world total to a prposed .9% of world total make any difference in the grand scale of things.

It will reduce global emissions by 0.5% - which is a big impact for a country with only 0.3% of the global population. More importantly, we will not be holding up the rest of the world like we have for the last decade. The geopolitical impact will be even greater than the more direct impact. For example, in a single move we could halve the number of developed countries that have not ratified kyoto.

Do you perhaps think that it is OK to do far more than your fair share of polluting so long as you think of yourself as part of a small group rather than a large one? Can you explain how that is rational?

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how will that help and at how much of an economic cost and disaster to our economy????

So now you are a doomsayer? It will only harm the economy if we go about it the wrong way - for example using Abbott's hair brained scheme.

A Carbon Tax will always be an expense - a negative cash flow. Carbon trading offers a chance for a positive cash flow. Overall it can be cheaper, but it offers more opportunities for 'creative accounting'. They did it in Europe. The net result of Kyoto was not very satisfactory.